A holistic approach that optimizes the use of the two traditionally separate areas of balance sheet management within the current market environment has proven to be extremely challenging for non-life insurers. The key issue for non-life insurers is how to boost return on capital in a continuing low-yield environment. In the first of the Holistic Balance Sheet Management series, Andrew Cox, Capital Optimization, Guy Carpenter, and Niall Clifford, Financial Strategy Group, Mercer, discuss how insurance companies may optimize their capital while addressing their concerns over economic capital, earnings risk, ratings agency requirements and increasing constraints due to Solvency II.

Among the topics and examples discussed, Mr. Cox and Mr. Clifford explore how insurers may best optimize their diversification potential to ultimately achieve lower solvency capital requirements under Solvency II. Return on incremental capital for property/casualty insurers is extremely high due to the effects of diversification, which occurs when there is an appropriate balance of risks. Many assess their level of diversification purely on the correlation between two types of risk, which although an important factor, is not the only one that needs to be considered for insurers to experience the full benefits. The main goal is to achieve a certain amount of balance between the risks in a portfolio and to avoid having any particular type of risk dominate. Working together, Guy Carpenter and Mercer can provide clients with a holistic approach to managing their underwriting risk versus their market risk and strike the optimal balance between them.

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